Chart 1: DJIA's daily chart as at August 11, 2010 (Source: Stockcharts)
The market correction is partly due to renewed concern that the US economy is heading towards a double dip. A good article to bring you up to speed on this on-and-off debate was given by Planet Yeltnick entitled "Double Dip Countdown: T-5 after Fed Punts". This part of the article accurately captured the market fear:
Already GDP, which was reported at 2.4%, was downgraded (by JP Morgan) a couple of days later due to a poor durables report, and now has been downgraded by them again to 1.3% due to a poor wholesale inventory report. Tomorrow international trade comes out, and JP will be at it again. They note that the GDP gets reported at the end of the month, with estimates for items that come in a week or two after. They think the estimate of international trade was "extreme", setting up another downwards revision tomorrow.
The other disturbing news is more leading indicators heading south. The US LEI is heading down, although not yet signaling a second recession. The Global OECD indicators are turning over and in some cases in negative territory. ...Albert Edwards, reports that the Conference Board indicator (excluding a yield curve input) is now in negative territory. He pulls out the yield curve since the short-end is artificially low due to ZIRP (zero interest rate policy). He concludes that market participants will soon realize that the US is Japan of ten years ago, and will follow a similar path of deflation and zero growth.
From Chart 2 below, we can see that the yield of the 10-year Treasury Note has been declining since April. The drop is gathering momentum after breaking below the horizontal support of 29.
Chart 2: TNX's daily chart as at August 11, 2010 (Source: Stockcharts)
Based on the bearish technical signals from DJIA & TNX, we can expect US equity markets to be weak in the near term. This weakness may drag down our stock market.
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